Power Systems Business Strategy

Power Systems Business Strategy Hitachi IR Day 2013 June 13, 2013 Tatsuro Ishizuka Vice President and Executive Officer President & CEO Power Systems Group and Power Systems Company Hitachi, Ltd.

Power Systems Business Strategy Contents 1. Business Overview and Market Environment 2. Business Policy and Growth Strategy 3. Base Businesses 4. Growth Businesses 5. Service Businesses 6. Business Performance Trends and Targets 7. Conclusion

1-1. Business Overview Thermal Power Business Nuclear Power Business Coal-fired thermal power plants Gas turbines Boiling water reactor nuclear power plants(abwr ESBWR) Major equipment of coal-fired thermal power plants Steam turbines 60% 20% FY2012 consolidated revenues 904.6 billion yen 20% Transmission & Distribution, Renewable Energy and Other Businesses Particle beam therapy systems Preventive maintenance, nuclear fuel cycle, etc. Wind power generation systems Boilers AQCS Transmission & distribution (T&D) systems Photovoltaic power generation systems Hydroelectric power generation systems, drive systems, smart grids, power semiconductors, etc. ABWR: Advanced Boiling Water Reactor ESBWR: Economic and Simplified Boiling Water Reactor 3

1-2. Market Trends World Electricity Generation by Energy Source 40 30 20 10 0 (Tr kwh) 100% 117% Source: World Energy Outlook 2012 158% 2010 2015 2030 Renewable energy Natural gas Oil Coal Nuclear World electricity generation is expected to grow by approx. 1.6 times(from 2010 to 2030) Market trends Many countries going ahead with nuclear power plans Accelerated adoption of renewable energy and increased demand for systems to stabilize power grids Expansion of power transmission and distribution market Steady growth in demand for coal-fired thermal power plants Increasing demand for AQCS due to regulation Emerging Countries (Asia, etc.) Looking to secure stable power supplies (demand for coal-fired thermal and nuclear power systems) Demand to strengthen power grids Market Trends by Region Developed Countries (Europe/Americas) Increasing and strengthening power grids due to the increase in renewable energy Demand for new nuclear power plants in Europe Japan Moves to separate power generation and power distribution Increasing and strengthening power grids due to the increase in renewable energy 4

1-3. FY2012 Results FY2011-FY2012 Results (Billion yen) FY2011 (Results) FY2012 (Results) YoY Revenues 832.4 904.6 109% EBIT 45.0 30.0 +75.0 Revenues Revenues rose mainly due to taking-over of the transmission and distribution systems business from Japan AE Power Systems Corporation, higher sales of thermal power generation systems and other factors. EBIT The segment saw a marked improvement in profitability and moved back into the black, mainly due to the absence of additional expenses in overseas thermal power generation systems recorded in FY2011, as well as the progress with cost-reduction measures. EBIT: Earnings before Interest and Taxes 5

1-4. Accelerate Global Business Development Global Business integration of the thermal power generation business 原 子 力 新 設 事 業 化 協 議 進 展 U.K. Acquisition of Horizon Nuclear Power Limited Poland Won orders for ultra-super critical coal-fired thermal power generation systems Indonesia Enhanced production facility for 500kV GIS GIS: Gas Insulated Switchgear 6

1-5. Overview of the Thermal Power Business Integration Thermal power business revenues FY2012: 510 billion yen Bolster and promote thermal power joint venture business to achieve leading global position Scope of business integration Synergies of Integrated Thermal Power Systems Company Thermal power generation system businesses (gas turbines, steam turbines, boilers, generators, etc.) Geothermal power system business Revenues Global competitors Integrated Thermal Power Systems Company Synergies with Mitsubishi Heavy Industries, Ltd. Hitachi AQCS (De-NOx, De-SOx, etc.) Asia & Pacific Strengthen further Shareholding ratio Hitachi 35% Mitsubishi Heavy Industries,Ltd 65% Schedule Effective date January 1 2014 Regions Products Europe, Middle East and Africa Gas turbines Coal-fired thermal power systems Small and mediumsized Low-grade coal-fired boilers Large-sized High-grade coal-fired boilers Small and mediumsized Expand sales channels High- and lowgrade coalfired boilers Large-sized + Small and medium-sized High-grade coal-fired boilers 7

1-6. Cooperation with Integrated Thermal Power Systems Company Expand business together with Hitachi s wide range of products, services and networks to become the global lead ing company Customers Integrated Thermal Power Systems Company Cooperation Gas turbines Steam turbines Boilers Control equipment Maintenance services Hitachi Capital,Ltd Finance Leasing Information & Telecommunication Systems Company Big Data utilization Cloud computing Power Systems Company Nuclear power systems Power transmission and distribution Electric control systems Renewable energy Hitachi Hitachi Transport System,Ltd Logistics Hitachi Power Solutions, Ltd. Monitoring Facility diagnosis Infrastructure Systems Company Group Compressors Inverters Demand Side Management (DSM) Smart cities 8

1-7. Target Position Business Portfolio Comparison FY2012 FY2015 FY2020 Nuclear Power Power Solutions and Others Nuclear Power Hitachi 394.6 billion yen Renewable Energy Transmission & Distribution Power Solutions and Others Nuclear Hitachi Power 500.0 billion yen Transmission & Distribution Renewable Energy Power Solutions and Others Hitachi 800.0 billion yen Transmission & Distribution Renewable Energy Nuclear Power Others Transmission & Distribution Company A Renewable Energy Others Company E Renewable Energy Nuclear Power Transmission & Distribution Renewable Energy Company D Nuclear Power Transmission & Distribution Nuclear Power Company C Renewable Energy Transmission & Distribution Company B Renewable Energy Hitachi s estimates of each company s revenues (excluding thermal power business) (size of pie chart indicates revenue size) (Base year FY2012) 9

Power Systems Business Strategy Contents 1. Business Overview and Market Environment 2. Business Policy and Growth Strategy 3. Base Businesses 4. Growth Businesses 5. Service Businesses 6. Business Performance Trends and Targets 7. Conclusion

2-1. Power Systems Company After Thermal Power Systems Integration-Business Expansion Strategy Focus on growth business fields and building earnings base First Pillar Expand base businesses Build new nuclear power plant, etc. (Billion yen) 8,000 800 Business Expansion 800 Second Pillar Service Business Expand growth businesses Power transmission and distribution, renewable energy, particle beam therapy systems Launch energy solutions business Third Pillar 4,000 400 400 500 Growth Businesses + Base Businesses Expand services business 0 FY2013 FY2015 FY2020 11

2-2. Strengthen Business Base Accelerate Hitachi Smart Transformation Project Reduce costs by 53 billion yen through cost structure reforms (FY2011 to FY2015 total) Production cost Create global manufacturing system and value chain Build new overseas manufacturing bases and ramp up production capacity Direct materials cost Expand global procurement and engineering Increase overseas procurement ratio FY2012 11% (Excluding thermal power business) FY2015 20% Indirect cost Optimize business structure by IT and structural reforms Use Group shared services to improve business efficiency Strengthen cash flow management Strengthen project management and improve profitability Bolster global supply chain management 12

2-3. Build Global Value Chain Expand and enhance global procurement, engineering and manufacturing bases Improve operational efficiency by strengthening global cooperation, and promote cost structure reforms Bolster networks by globalizing human resources and IT systems Europe Dusseldorf Dalian Power Systems Company Americas China New York Shanghai Bangalore Asia Singapore Power Systems Company s manufacturing and engineering bases Power Systems Company s procurement bases Hitachi Group s procurement bases 13

Power Systems Business Strategy Contents 1. Business Overview and Market Environment 2. Business Policy and Growth Strategy 3. Base Businesses 4. Growth Businesses 5. Service Businesses 6. Business Performance Trends and Targets 7. Conclusion

3-1. Nuclear Power Business-Basic Policy Raise the safety of nuclear power generation as an effective source of energy for curbing CO 2 emissions to meet continuing global demand. Revenues FY2012: 160 billion yen FY2020: 360 billion yen Respond to the Fukushima restoration and revitalization, and promote measures to increase plant safety Fuel debris * removal and eventual reactor decommissioning Improve plant safety in conformity with the new safety standards for nuclear power plants Develop ABWR designs with enhanced safety, next-generation safety technologies Promote and strengthen overseas energy solutions business Implement measures for constructing ABWRs in the UK Focus on expanding sales to countries continuing to construct new nuclear power plants *Fuel debris: material in which fuel and its cladding tubes, etc. have melted and re-solidified 15

3-2. Respond to the Fukushima Restoration and Revitalization, and Steadily Promote Measures to Increase Plant Safety Support the Fukushima restoration and revitalization Double-arm robots Measures to enhance plant safety Filter Containment Venting System (cooperation with AREVA) Strengthen cooperative relationship with AREVA Water treatment systems Water supply pumps Strengthen performance of high-pressure coolant injection system Cooperate with GE-Hitachi Nuclear Energy, Ltd. Filter Adsorption towers Areva GmbH 2013. All rights reserved. 16

3-3. Step Up Overseas Business Development Promote overseas development of the nuclear power systems business under the One Team framework with GE Acquired UK Horizon Nuclear Power (Nov. 2012) Promote plans to construct new nuclear power plants at two sites * Utilize PPP experience in IEP Promote acquisition of GDA approval Focus on countries continuing to construct new nuclear power plants Sweden Finland Canada U.K. Lithuania U.S. HEU HNP Saudi Arabia Poland India Hitachi-GE Nuclear Energy Vietnam Malaysia HPSA : Hitachi Power Systems America Ltd. HEU : Hitachi Europe Ltd. HNP : Horizon Nuclear Power Ltd. *Wylfa and Oldbury HPSA GE-Hitachi Nuclear Energy :Bases IEP :Intercity Express Programme PPP :Public Private Partnership GDA :Generic Design Assessment Suppliers meeting in the UK Continue to support Lithuania s nuclear power plant construction plans Propose ABWRs to Vietnam and other countries Plan construction of ESBWRs for Teollisuuden Voima Oyj (TVO) in Finland and Dominion Resources, Inc. in the U.S. Cooperate with and strengthen support for GE-Hitachi 17

Power Systems Business Strategy Contents 1. Business Overview and Market Environment 2. Business Policy and Growth Strategy 3. Base Businesses 4. Growth Businesses 5. Service Businesses 6. Business Performance Trends and Targets 7. Conclusion

4-1. Transmission & Distribution Business-Basic Policy Revenues FY2012: 70 billion yen FY2015: 110 billion yen 20 10 0 Develop into a core business alongside the thermal power and nuclear power businesses (Trillion yen) Expand T&D business globally based on competitive products and abundant supply experiences Strengthen systems integration business fusing equipment and IT 5 6 Accelerated Global Market Expansion CAGR 6% 10 CAGR 8% FY2000 FY2005 FY2010 FY2015 FY2020 15 21 *Hitachi estimates High-value-added systems Systems, Transformers etc. 2020 21 trillion yen Power Switchgear electronics Automation Equipment Japan:Expansion of wide-area grid systems and interconnection between West and East, as well as separation of electricity generation and transmission and introduction of renewable energy Global: Expansion of a high-growth and globalized market driven by the economic growth in emerging countries and demand for upgrade in developed countries. *Hitachi estimates CAGR: Compound Annual Growth Rate 19

4-2. Strengthen Transmission & Distribution Business Provide integrated solutions from competitive components to systems Substation equipment Switchgear(GIS) Transformers Ultra high voltage and extra high voltage transmission Wide-area grid stabilization systems Battery storage systems Monitoring control systems Supervisory and control system Protection and control Substation equipment Monitoring control Power electronics systems Fusion of equipment and IT Power electronics HVDC STATCOM Power supply systems Smart grids HVDC STATCOM: Static Synchronous Compensator 20

4-3. Key Systems Businesses Full turnkey substations Provide integrated EPCs based on high-quality equipment and systems Supply experiences of more than 200 sites worldwide HVDC Offer interconnection and transmission with submarine cables Support for strengthen wide-area grids with proven and stable operation experiences Ultra high voltage (UHV) systems(800-1,200kv) Minimize long-distance transmission losses Expand business with world-leading technologies Russia South Africa India Supply experiences China U.S. Total experiences UHV GCB over 60 units Canada Brazil Wide-area grid stabilization systems Prevent large-scale power outages through forecast and simulation-based control Grid stabilization With battery storage systems, etc. GCB: Gas Circuit Breaker 21

4-4. Strengthen Global Business Framework Strengthen existing engineering and manufacturing bases, and build new bases Hitachi (Suzhou) EHV Switchgear Corporation SDEE Hitachi High-Voltage Switchgear Co., Ltd. Hitachi Works Omika Works Hitachi HVB,Inc US operation started in 1977 Kuwait office PT. Hitachi Power Systems Indonesia Hitachi T&D Systems Asia Pte. Ltd. (Singapore) :Manufacturing bases :Engineering bases Increased production buildings in March 2013 (doubled production capacity) The only EHV switchgear manufacturer company in ASEAN area 22

4-5. Renewable Energy Business and Others-Basic Policy Revenues FY2012: 160 billion yen FY2015: 240 billion yen Renewable Energy Business Help create a low-carbon society by wind and photovoltaic power systems Provide integrated services extending from grid connection and construction to maintenance, operation and monitoring Particle Beam Therapy System Business Expand business through leading-edge technologies such as world-leading advanced spot scanning irradiation technology *, and outstanding operational track records in Japan and the U.S. *Compatible with beam scanning system 23

4-6. Renewable Energy Business Wind Power Systems Won orders for more than 100 x 2 MW-class Hitachi wind turbines to date No.1 Japan market share in 2012 * Offshore initiatives (commenced trials of experimental offshore floating wind farm projects: Fukushima, Goto Islands) Development of 5 MW-class, lightweight Hitachi wind turbines Field test in 2014, commence sales in 2015 Image of Offshore Wind Farm Using 5 MW Wind Turbines Photovoltaic Power Systems (Mega Solar) Coordination ability trusted by operators Extensive track record in large-scale projects World-class core product lineup, including power conditioners (PCS) Japan s Largest class Mega-Solar Systems (82 MW) Battery System and Control Systems for Easing Output Fluctuation Conducting demonstration trials with NEDO and others in locations around the world Oita Solar Power Total area: approx. 1km 2 (the area of approx. 22 Tokyo Domes) Panels: approx. 340,000 (approx. 500 km when laid down end to end: distance between Tokyo and Osaka) *Source: A BTM Wind Report: World Market Update 2012 24

4-7. Particle Beam Therapy System Business Create technologies using accelerator technology and plant engineering skills amassed over many years Operating Track Record Outstanding operational track record for more than 10 years in the U.S. and Japan Delivered Japan s first proton beam spot scanning irradiation system (scheduled to begin offering treatment in FY2013) Nagoya Proton Therapy Center Construction underway at three famous hospitals in the U.S. Market Prospects and Global Sales Promotion Activities Expand markets to Europe/Russia, Asia and the Middle East Be a key player in Japan s drive to export medical technologies Signing ceremony with Russian medical and research institute Held user meetings U.S. Minnesota U.S. Tennessee Target: over 30% market share 25

4-8. Energy Solutions Business Hitachi will be leading energy solutions business Energy shortages Environmental problems Fund shortages Grid stabilization Various issues and needs among countries, regions and power customers Energy security Human resource development Optimal distributed power source demand Renewable energy introduction Energy grand design formulation Provide optimal solutions combined to match customer needs Components Systems proposals Service enhancement IT integration Finance and leasing Thermal power generation solutions Hitachi Group s collective capabilities 26

Power Systems Business Strategy Contents 1. Business Overview and Market Environment 2. Business Policy and Growth Strategy 3. Base Businesses 4. Growth Businesses 5. Service Businesses 6. Business Performance Trends and Targets 7. Conclusion

5. Expand Service Business Revenues FY2013:140 billion yen FY2015:210 billion yen Expand preventive maintenance and enhanced maintenance services Expand preventive maintenance business further Provide advanced maintenance service business based on greater IT utilization Expand remote monitoring, long-term service agreements (LTSA) and enterprise asset management (EAM) Provide integrated service solutions through to operation and maintenance Predictive diagnosis system Learns facility operations automatically and detects abnormal conditions Automated diagnosis Remote monitoring Propose predictive diagnosis and maintenance to customers Operating data reference Cloud-based system Automated operational data collection Customer facilities Plant facilities Industrial facilities Medical equipment 28

Power Systems Business Strategy Contents 1. Business Overview and Market Environment 2. Business Policy and Growth Strategy 3. Base Businesses 4. Growth Businesses 5. Service Businesses 6. Business Performance Trends and Targets 7. Conclusion

6-1. Orders FY2013 forecast excludes the thermal power systems business for January-March 2014 Order received (Billion yen) 1,000 800 600 400 200 0 691.7 FY2010 685.7 FY2011 848.3 FY2012 650.0 FY2013 Forecast Thermal Power Business Nuclear Power Business, T&D, Renewable Energy and Other Businesses Main FY2012 Orders Thermal: large projects in India, Poland, South Korea, etc. Renewable energy: large wind power and mega solar projects FY2013 Initiatives Step up activities to win orders centered on projects for improving the safety of exsting nuclear power plants in Japan and renewable energy, as well as overseas thermal power and T&D projects 30

6-2. Business Performance Trends Revenues (Billion yen) 1000 800 600 Overseas revenue ratio 39% 34% 813.2 832.4 [39%] 36% [840.0] 904.6 [12.0] 30.0 43% 750.0 ~ (30%) [50%] [58.0] 28% 58.0 (450.0) [950.0] 500.0 [6.1%] 11.6% EBIT (Billion yen) 60 50 40 30 400 200 0 15.6 Nuclear power business revenues 1.9% FY2010 5.4% FY2011 T&D business revenues 45.0 [1.4%] 3.3% FY2012 Renewable energy business and others revenues 14.0 1.9% FY2013 Forecast Thermal power business revenues FY2015 Target *1: [ ] Figures announced on June 14, 2012 (EBIT and the EBIT ratio were calculated based on previous forecasts) *2: ( ) Figures announced on June 14, 2012 excluding the thermal power business ~ ~ EBIT 20 10 EBIT ratio 0 31

6-3. Differences from Previous Forecast Revenues EBIT FY2012(Results) FY2015(Target) Overseas revenue ratio FY2012(Results) Previous forecast 840.0 FY2015(Target) (450.0) 950.0 Results and revised forecast 904.6 500.0 Calculated based on previous forecast 12.0 58.0 Results and revised forecast 30.0 58.0 Revenues 39% (Billion yen) (30%) 50% Results and revised forecast 36% 28% Main differences ( )Figures exclude the thermal power business Revenues FY2012(Results) Saw higher revenues in the thermal power systems business, etc. FY2015(Target) Targeting expansion in growth and service business, etc., despite delays with the construction of new nuclear power plants EBIT Reflects increased revenues, etc. Maintaining previous target 32

6-4. FY 2013 Forecast FY2012 Results and FY2013 Forecast (Billion yen) FY2012(Results) FY2013(Forecast) YoY Revenues 904.6 750.0 83% EBIT 30.0 14.0 16.0 Revenues Forecasting decrease in revenues, due to lower sales from preventive maintenance services for nuclear power generation systems in Japan, and the establishment of a joint venture in thermal power systems with Mitsubishi Heavy Industries, Ltd. scheduled for January 2014. Projecting solid growth in revenues in the T&D, renewable energy and other businesses EBIT Forecasting decrease in EBIT, in line with the projected decrease in revenues. 33

Power Systems Business Strategy Contents 1. Business Overview and Market Environment 2. Business Policy and Growth Strategy 3. Base Businesses 4. Growth Businesses 5. Service Businesses 6. Business Performance Trends and Targets 7. Conclusion

7. Conclusion The World Market Leader Advancing the Future Global Society with Evolutionary Energy Technologies Accelerate promotion of global growth strategy Capture synergies with the integrated thermal power business FY2015 Targets Revenues: 500 billion yen (overseas revenue ratio: 28%) EBIT ratio: 11.6% Gross margin: 3 point improvement (Vs. FY2012) SG&A expense ratio: Hold steady (Vs. FY2012) 35

Cautionary Statement Certain statements found in this document may constitute forward-looking statements as defined in the U.S. Private Securities Litigation Reform Act of 1995. Such forward-looking statements reflect management s current views with respect to certain future events and financial performance and include any statement that does not directly relate to any historical or current fact. Words such as anticipate, believe, expect, estimate, forecast, intend, plan, project and similar expressions which indicate future events and trends may identify forward-looking statements. Such statements are based on currently available information and are subject to various risks and uncertainties that could cause actual results to differ materially from those projected or implied in the forward-looking statements and from historical trends. Certain forward-looking statements are based upon current assumptions of future events which may not prove to be accurate. Undue reliance should not be placed on forward-looking statements, as such statements speak only as of the date of this document. Factors that could cause actual results to differ materially from those projected or implied in any forward-looking statement and from historical trends include, but are not limited to: economic conditions, including consumer spending and plant and equipment investment in Hitachi s major markets, particularly Japan, Asia, the United States and Europe, as well as levels of demand in the major industrial sectors Hitachi serves, including, without limitation, the information, electronics, automotive, construction and financial sectors; exchange rate fluctuations of the yen against other currencies in which Hitachi makes significant sales or in which Hitachi s assets and liabilities are denominated, particularly against the U.S. dollar and the euro; uncertainty as to Hitachi s ability to access, or access on favorable terms, liquidity or long-term financing; uncertainty as to general market price levels for equity securities, declines in which may require Hitachi to write down equity securities that it holds; the potential for significant losses on Hitachi s investments in equity method affiliates; increased commoditization of information technology products and digital media-related products and intensifying price competition for such products, particularly in the Digital Media & Consumer Products segments; uncertainty as to Hitachi s ability to continue to develop and market products that incorporate new technologies on a timely and cost-effective basis and to achieve market acceptance for such products; rapid technological innovation; the possibility of cost fluctuations during the lifetime of, or cancellation of, long-term contracts for which Hitachi uses the percentage-of-completion method to recognize revenue from sales; fluctuations in the price of raw materials including, without limitation, petroleum and other materials, such as copper, steel, aluminum, synthetic resins, rare metals and rare-earth minerals, or shortages of materials, parts and components; fluctuations in product demand and industry capacity; uncertainty as to Hitachi s ability to implement measures to reduce the potential negative impact of fluctuations in product demand, exchange rates and/or price of raw materials or shortages of materials, parts and components; uncertainty as to Hitachi s ability to achieve the anticipated benefits of its strategy to strengthen its Social Innovation Business; uncertainty as to the success of restructuring efforts to improve management efficiency by divesting or otherwise exiting underperforming businesses and to strengthen competitiveness; uncertainty as to the success of cost reduction measures; general socioeconomic and political conditions and the regulatory and trade environment of countries where Hitachi conducts business, particularly Japan, Asia, the United States and Europe, including, without limitation, direct or indirect restrictions by other nations on imports and differences in commercial and business customs including, without limitation, contract terms and conditions and labor relations; uncertainty as to the success of alliances upon which Hitachi depends, some of which Hitachi may not control, with other corporations in the design and development of certain key products; uncertainty as to Hitachi s access to, or ability to protect, certain intellectual property rights, particularly those related to electronics and data processing technologies; uncertainty as to the outcome of litigation, regulatory investigations and other legal proceedings of which the Company, its subsidiaries or its equity method affiliates have become or may become parties; the possibility of incurring expenses resulting from any defects in products or services of Hitachi; the possibility of disruption of Hitachi s operations by earthquakes, tsunamis or other natural disasters; uncertainty as to Hitachi s ability to maintain the integrity of its information systems, as well as Hitachi s ability to protect its confidential information or that of its customers; uncertainty as to the accuracy of key assumptions Hitachi uses to evaluate its significant employee benefit-related costs; and uncertainty as to Hitachi s ability to attract and retain skilled personnel. The factors listed above are not all-inclusive and are in addition to other factors contained in other materials published by Hitachi. 36